Portability is a key issue in the pension debate. But what exactly does this mean?
Portability is the ability for an individual to take their contributions and investments with them wherever they may go, whether across state lines, organizations, or sectors.
Traditional pension benefits aren’t portable. When a teacher moves to a new state, her previous service years don’t automatically rollover for free. Instead, she starts back at zero.
Moreover, once a teacher leaves the state retirement system, her pension benefit stops growing. A teacher’s pension is a fixed, defined future benefit, and bears no direct relation to a teacher’s employee contributions. This amount is locked and she cannot continue to grow it once she leaves the system. Whether the market booms or plummets, the teacher will get the same pension benefit at retirement.
For example, consider a 25-year-old teacher who teaches for 15 years and then moves to another state at age 40. Her pension is calculated based on her final salary when she leaves; this amount remains fixed. But she cannot collect this benefit right away. Instead, she has to wait another decade or two until she reaches the plan’s predetermined normal retirement age—usually around age 60 to 65.
And that creates a problematic time gap. The teacher’s already meager pension benefit is not growing and is instead eroding away with inflation. Most states will add cost-of-living adjustments once she begins collecting her pension, but not before then. In the meantime, she could have been investing this money elsewhere and would likely come out with better gains if she had conservatively invested on her own.
What makes portability so critical, then, is it allows workers flexibility without these penalties. Teachers who move can “buy” service credits that count toward their new pension; but, this can end up being costly and won’t necessarily make up for lost years. In the private sector, workers can continue to invest and grow their contributions until they officially retire, regardless of whether they move across companies or state lines. Teachers, as one of the largest class of workers with a college degree, should be afforded this flexibility also.
Note: Under this system, second-career teachers who begin teaching at older ages are actually better off because there isn’t as much lag time between the time they leave and when they retire.
This post originally appeared on TeacherPensions.org
Last updated June 24, 2016